Different Horses ...

It’s been a roller-coaster of a ride for Qantas in recent times. With passenger traffic, freight and yields experiencing terrifying dips, the “Spirit of Australia” has had to respond with drastic action for the slow climb upwards.

Reducing flying capacity, deferring delivery of new aircraft, a slew of lay-offs, internal reorganization, and raising $460 million (AUD500 million) by selling new shares to institutional investors have all been on the agenda. And, after years of on-off merger talks with a host of international suitors large and small — British Airways, Air New Zealand, Singapore Airlines and Malaysia Airlines among them — in mid-2009 Qantas declared consolidation off the agenda in order to concentrate its entire focus on management of the core business.

That core business is flying. Aside from the main network carrier, the Group runs Jetstar, a regional low-fare carrier. QantasLink, a domestic feeder, comes under the main Qantas brand.

The evidence suggests the strategy is paying dividends. While IATA predicts continuing losses for the world’s airlines in 2010, Qantas recorded a statutory profit before tax of $83 million (AUD90 million) for the half year ended Dec. 31, 2009.

“While the operating environment has been unprecedented and challenging … our two-brand strategy, focused on growing the full service, premium Qantas and low-fares Jetstar, is not only delivering benefits to our customers, but also to our shareholders,” notes Alan Joyce, Qantas chief executive officer.

Even with the aircraft deferrals, the Group still took delivery of 13 new aircraft during the second half of 2009 — two A380s, one A330, three B737-800s, two A320s and five Q400s. Adds Joyce: “We remained committed to a long-term fleet renewal, backed by one of the world’s largest aircraft order books, with more than 160 new aircraft to be delivered over the next 10 years.

“This will result in new aircraft such as the B787 and more A380s, giving the group access to operational cost savings, growth and new market opportunities,” he continues. “We have also undertaken an exhaustive review of where we believe international demand is heading, and how Qantas’ B747 and A380 fleets should be best configured to meet that demand.”

All for one?However, running a diverse mix of airlines is complex. Defining the synergies and avoiding the inconsistencies means treading a fine line. Particularly thorny is the issue of how to organize ground handling.

Ground handling in Australia has become more competitive over the last 10 years, with a number of new entrants. Within Australia, Qantas self-handles. Jetstar also uses its own team at the main airports — with ramp services provided by the wholly-owned subsidiary, Express Ground Handling — but also incorporates a degree of third-party assistance. Aero-Care (Sydney International), Skystar (Perth International, Darwin International & Domestic), Oceania (Gold Coast ramp), Air Trade (Hobart and Launceston) and Aviation Ground Handling (Queensland Airports) are all involved.

“Qantas, Jetstar and QantasLink procure ground handling separately and decisions are made on a case-by-case basis,” says Zac Ayoubi, manager, Commercial Ground Handling Services, Qantas. “In certain ports, Qantas provides ground handling for Jetstar and QantasLink, but we must compete for this business as all providers do.”

Jetstar’s key focus in relation to its ground handling arrangements is to maintain its highly competitive cost structure. “It is imperative for us to get the right balance of cost and professional services to maintain the constant delivery of low fares, safe operations and great customer outcomes,” says a Jetstar spokeswoman.

The diverse requirements seem to preclude the economies of scale that come with a coordinated program. Other evidence confirms the brands are following different paths. Qantas recently announced a hike in its ground services charges. Even its own subsidiary, Jetstar, was driven away by the 30 percent increase.

A world firstBut really, the group strategy is about horses for courses. The airlines may be very different but the overall blend provides a comprehensive offering to the market. Efficiency, in this case, is tapping every revenue stream while managing costs appropriately.

The alliance between Jetstar and AirAsia — a world first for low cost carriers — has added extra spice to this already intriguing “fusion” recipe. The alliance aim is to instigate a round of major cost reductions that will, ultimately, translate into even lower fares. Naturally, ground services savings are high on the agenda.

“We are currently evaluating the potential opportunities this may present for cooperative arrangements for airport passenger and ramp handling in Asia at common airports and how we can better work with AirAsia’s operations in Australian ports such as Gold Coast, Perth and Melbourne,” says the Jetstar spokeswoman.

Significantly, the additional leverage that joint purchasing could bring opens up the potential of working with the aircraft manufacturers. Bruce Buchanan, Jetstar’s chief executive officer, says the configuration and designs for the next generation narrow body need to meet their business requirements. Tony Fernandes, AirAsia Group CEO, concurs, noting that a common aircraft type specification should be proactively pursued by both airlines because of the many efficiencies it would bring.

Technical improvementsBut despite the multitude of drivers affecting ground handling, there is a simple philosophy driving the decisions at the Qantas Group: reduce costs but increase the quality. These two aims are not necessarily mutually exclusive, but combining them isn’t painless either.

“Qantas has always had a focus on delivering a premium ground handling service, and this remains the case,” Ayoubi says. “However, the global financial crisis has had a significant impact on global aviation — cost has become a key factor in airline ground handling procurement. This and not organizational change is the key issue on the demand side.”

Solid infrastructure will play a vital role in determining both quality and costs. “In terms of infrastructure for ground handling, Australian airports are strong by international standards, though it is always possible to improve,” Ayoubi says. “Space is the No. 1 consideration, and we have more flexibility to influence infrastructure decisions at our domestic terminals than at international terminals.”

However, the real deal maker is innovative technology. Qantas has recently implemented the GroundStar system, supplied by German company, INFORM. This provides management with a means to optimize rostering and operational planning, as well as communication, reporting and analytical tools.

Prior to the implementation, the required efficiency levels were simply unachievable, with legacy systems and spreadsheets holding sway. It is reported summer/winter season roster planning took about three months from production to revision, publication and agreement. GroundStar is now active and used daily throughout Qantas’ Australian operations to support the staff planning, rostering and deployment.

“The key to improved efficiency is maximizing productivity while delivering a quality product,” Ayoubi notes. “Investment in new equipment and technology, as well as training and internal policies and processes, will be very important.”

The airline’s commitment to next-generation check-in — known as “Airport of the Future” — will also affect ground services. During 2010, the first of Qantas frequent flyer members above Silver level will receive their own dedicated boarding pass and a permanent bag tag. An intelligent chip will encode the relevant information, and the boarding pass will also act as means of recognition at security checkpoints, allowing frequent flyers to speed through.

“It is genuinely a big challenge, and especially the permanent bag-tag component, because it is an absolute world-first,” Qantas CEO Joyce says. “But we are not afraid to step into the future, and I’ve asked our people to work to an ambitious timetable.”

Part of a $184 million (AUD200 million) investment by Qantas in its airport product, the new setup is set to be trialed at Perth in mid-2010, followed by Sydney and Melbourne in early 2011. “The aspiration is to at least halve check-in time, enabling existing ground employees to focus more on customer care,” says Joyce.

Qantas continues to push the boundaries and has implemented a program called Q Future, exploring new technologies and processes aimed at targeting $1.38 billion (AUD1.5 billion) in sustainable benefits over three years.

However, safety will always come top of the list according to Ayoubi. “Safety is paramount at Qantas,” he confirms. “That is the first priority. Striking the balance between growth and operational efficiency is the commercial challenge — the intention is certainly to grow. Growth requires continuing improvements in productivity and disciplined cost control, particularly in the face of increased competition.”

Consolidation too may be back on the cards. The Australian government’s late-2009 announcement that it plans to liberalize foreign ownership rules for Qantas would seem to fly in the face of the carrier’s current management strategy. Alternatively, it could prove a useful tool in Qantas’ armory, providing a much-needed catalyst for the airline to evolve strategic partnerships. Any negotiations would be from a position of relative strength.

While the aviation roller-coaster seems far from running its course, for Qantas at least, the ride may prove less “white knuckle” than previously.